How to purchase inventory with acquisition?

November 16, 2023

by a searcher from Florida State University in Leland, NC, USA

What are some creative ways to purchase inventory with the acquisition of an existing retail business? The owners wont consider consigning it to us, and the current SBA rates are high. They say they don't know exactly (piece by piece) what they have in stock to know what they purchased vs what we purchase. Thank you!

0 Likes

9 Replies

187 Views

Replies

Reply by a searcher
from Vanderbilt University in Cincinnati, OH, USA

You’ve hit upon one of my biggest pet peeves. If you are buying based on some sort of SDE/CF multiple, normalized working capital (including inventory) should be included in the purchase price. The cash flow isn’t realized if the working capital isn’t there and shouldn’t be a separate amount. I’ve never witnessed the separate inventory until I started looking at lower middle market deals. Big PE does not buy separately. I blame the intermediaries and uninformed buyers.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I just answered a similar question the other day. Here is my answer again if it helps. I have had a lot of clients experience sellers that insist on valuing the inventory and business separately. My recommendation to clients is that if they are getting the business at a fair multiple and are buying the inventory separate and combined are at a reasonable multiple, then it makes sense. However, you cannot pay the maximum market multiple for the business and then also buy the inventory separately, because then you are over-paying for the business. I like Michael's approach above. I would figure out what the working capital need is and be sure that is factored in and that the overall price you are paying either separate or combined is at a reasonable market multiple.

+7 more replies.

Join the discussion